- What is the investor's adjusted basis in the 50 replacement shares?
Answer: $2,750
IRC § 1091(a) disallows a loss on the sale of stock if substantially identical stock is acquired within 30 days before or after the sale. IRC § 1091(d) adds the disallowed loss to the basis of the replacement stock. The loss on the 100 shares sold was $1,000. Because only 50 of those shares were replaced within the 61-day period, only $500 of the loss is disallowed. The replacement basis is the $2,250 cost plus the $500 disallowed loss, or $2,750. Choice A ignores the wash-sale rule entirely. Choice B uses the old $50 per-share cost for the replacement shares. Choice D adds the entire $1,000 loss to the 50 replacement shares. Thus Choice C is correct.
- What is the taxpayer's adjusted basis in the 60 replacement shares immediately after the December 20 purchase?
Answer: $3,300
IRC §1091(a), (d). The realized loss on the 100 shares is $1,000. Because the taxpayer bought 60 substantially identical shares within 30 days after the sale, 60/100 of the loss is disallowed: 60/100 × $1,000 = $600. The other $400 of the loss is allowed. The basis of the replacement shares is their $2,700 cost plus the $600 disallowed loss: $2,700 + $600 = $3,300. Choice A is the cost without the wash-sale adjustment. Choice B applies the original $50 per-share basis to the replacement shares. Choice D adds the entire $1,000 loss to the replacement shares, ignoring that only 60 shares were reacquired.
- On January 3, 2019, a taxpayer bought 100 shares of QRS common stock for $10,000. In July 2021, QRS declared a 2-for-1 stock split, and the taxpayer received 100 additional shares. On March 10, 2025, she bought 100 more shares of QRS for $6,500. On December 1, 2025, she sold 250 shares of QRS for $11,000. On December 15, 2025, she bought 250 shares of QRS for $15,500. She did not designate which shares were sold and still owns the QRS shares that were not sold. What is her basis in the 250 shares purchased on December 15?
Answer: $17,750
IRC § 1012; IRC § 1091(a), (d); Treas. Reg. § 1.1012-1(c). The 2-for-1 split does not change aggregate basis; the 2019 lot becomes 200 shares with a $10,000 total basis. Because no shares were designated, the 250 shares sold are identified by FIFO: all 200 split-adjusted shares ($10,000) plus 50 of the March lot (50/100 × $6,500 = $3,250), for a total basis of $13,250. The $11,000 proceeds produce a $2,250 realized loss. The December 15 purchase is substantially identical stock bought within 30 days after the sale, so the loss is disallowed under § 1091(a). Under § 1091(d), the disallowed loss is added to the cost of the replacement shares: $15,500 + $2,250 = $17,750. Choice A ($15,500) ignores the wash-sale rule. Choice C ($18,250) uses a pro-rata average basis instead of FIFO; average basis is not available for individual stock lots here. Choice D ($21,000) assigns the entire $16,500 pre-sale basis to the sold shares, giving the unsold shares a zero basis and overstating the disallowed loss.
- What is the wife's basis in the 200 shares immediately after the distribution?
Answer: $120,000
IRC §1014(a), (b)(6). For community property, both the decedent's half and the surviving spouse's half receive a new basis equal to the fair market value at the decedent's death, unless alternate valuation is elected. Here the total basis becomes $120,000, and the distribution-date value is irrelevant because alternate valuation was not elected. Choice A keeps the pre-death carryover basis. Choice B steps up only the husband's half, which is the rule for jointly held spousal property in a common-law state (§ 2040(b)), not the community-property rule. Choice D uses the fair market value on the distribution date.
- A taxpayer owns a rental building with an adjusted basis of $200,000 and a fair market value of $300,000, subject to a mortgage of $90,000. In 2025, the taxpayer transferred the building and $20,000 cash in exchange for a different rental building with a fair market value of $350,000, subject to a mortgage of $120,000. The taxpayer received no cash or other property. The exchange qualifies as a like-kind exchange under IRC § 1031. What is the taxpayer's basis in the newly acquired building?
Answer: $250,000
IRC § 1031(a), (b), (d). No gain is recognized because the taxpayer received no boot: the $90,000 liability relieved is less than the $120,000 liability assumed, and the $20,000 cash was boot paid, not boot received. Under § 1031(d), basis equals the adjusted basis of the property transferred, increased by gain recognized, cash paid, and debt assumed on the replacement, and decreased by debt relieved: $200,000 + $0 + $20,000 + $120,000 − $90,000 = $250,000. Choice A ($230,000) omits the $20,000 cash paid, using only the net debt assumption. Choice C ($340,000) adds the $120,000 debt assumed but fails to subtract the $90,000 debt relieved. Choice D ($350,000) uses the replacement property's fair market value, ignoring the carryover and deferred-gain basis rules.
- In 2015, a taxpayer bought a parcel of unimproved land for $50,000. In 2018, she gave the land to her niece. On the date of the gift, the land's fair market value was $80,000. The gift was a taxable gift, and the donor paid $7,000 of federal gift tax, of which $2,000 was attributable to the appreciation in the land. The niece made no improvements to the land. In 2025, the niece sold the land for $100,000 and paid $5,000 in selling expenses. What amount of gain must the niece recognize?
Answer: $43,000 gain
IRC § 1015(a) and (d). For a gift, the donee takes the donor's adjusted basis increased by the gift tax allocable to the gift's appreciation: $50,000 + $2,000 = $52,000. The amount realized is the sale price less selling expenses: $100,000 − $5,000 = $95,000. Gain is $95,000 − $52,000 = $43,000. Choice A ($15,000) uses the $80,000 fair market value on the date of the gift as the donee's basis, which is the stepped-up basis rule for inherited property, not gift property. Choice B ($38,000) adds the entire $7,000 gift tax paid instead of only the $2,000 appreciation-allocable portion. Choice D ($45,000) uses the donor's unadjusted $50,000 basis, omitting the IRC § 1015(d) gift tax increase.
- What is the taxpayer's adjusted basis in the replacement lot immediately after the exchange?
Answer: $100,000
IRC §1031(a), (b), (d). The realized gain is $190,000 - $100,000 = $90,000. The $25,000 cash is boot, so gain is recognized only to the extent of the $25,000 boot. Basis in the replacement property equals the adjusted basis of the property transferred, minus boot received, plus gain recognized: $100,000 - $25,000 + $25,000 = $100,000. Choice A subtracts the boot but omits the recognized gain. Choice C adds the boot to the old basis without subtracting it. Choice D uses the replacement property's fair market value and ignores the nonrecognition rules.
- Which of the following is correct regarding Victor's basis in the stock after Ned's death?
Answer: The basis is Victor's $20,000 adjusted basis in the stock, because the stock was acquired by gift within one year of death and passed back to the donor.
IRC § 1014(a) generally gives property acquired from a decedent a basis equal to its fair market value at death. IRC § 1014(e) overrides that rule when appreciated property was acquired by the decedent by gift within one year of death and passes back to the donor. Ned received the stock by gift on May 1, 2025, died within one year, and the stock passed to Victor, the donor. Because Victor paid no gift tax, Ned's adjusted basis immediately before death was Victor's $20,000 carryover basis, so Victor's basis remains $20,000. Choice B states the general § 1014(a) rule, which is displaced by the exception. Choice C misstates gift basis: a donee generally receives a carryover basis under § 1015, not the gift-date fair market value. Choice D is not the basis rule for property included in a decedent's estate; § 1014(a) would provide a fair market value basis, but § 1014(e) displaces it here. Thus Choice A is correct.
- What are Troy's recognized gain and his basis in the warehouse?
Answer: $150,000 gain; $400,000 basis
IRC § 1031(b) limits recognized gain in a like-kind exchange to the lesser of realized gain and net boot received. Under IRC § 1031(d), liabilities assumed by the other party are treated as money received, and liabilities assumed by Troy are treated as money paid. Troy's net boot is $100,000 cash + $100,000 mortgage relief − $50,000 mortgage assumed = $150,000. His realized gain is $900,000 − $400,000 = $500,000, so the recognized gain is $150,000. His basis is the $400,000 adjusted basis of the property transferred plus the $150,000 recognized gain minus the $150,000 net boot, or $400,000. Choice A treats only the cash as boot. Choice C fails to reduce basis by the net boot. Choice D treats gross boot as $200,000 and ignores the mortgage Troy assumed. Thus Choice B is correct.
- What is the taxpayer's adjusted basis in the 10 new shares?
Answer: $909.09, because the $10,000 basis is allocated over all 110 shares.
IRC §§305(a), 307(a). A common stock dividend on common stock is not included in income, and the adjusted basis of the old shares is allocated between the old and the new shares based on their relative fair market values. Because all 110 shares are identical, the new shares receive a basis of $10,000 × (10/110) = $909.09. Choice A confuses nontaxability with zero basis. Choice C gives the new shares the pre-dividend per-share basis and fails to reduce the basis of the old shares. Choice D treats the stock dividend as taxable and assigns a fair market value basis to the new shares.
- What is the father's basis in the shares immediately after the daughter's death?
Answer: $30,000, because §1014(e) denies a step-up when the property returns to the donor.
IRC §1014(a), (e). Property acquired from a decedent generally takes a fair market value basis at death, but §1014(e) overrides that rule when the decedent acquired the property by gift within one year of death and the property passes to the donor or the donor's spouse. The daughter received the stock from her father by gift within one year of death and left it back to him, so the father's basis is the daughter's adjusted basis, which was the father's $30,000 carryover basis. Choice C states the general rule but ignores the exception. Choice B incorrectly treats the gift-date fair market value as the basis. Choice D incorrectly conditions the basis on whether estate tax was owed.
- Which of the following correctly describes the tax treatment?
Answer: The former wife reports a $28,000 long-term capital gain because the husband's basis and holding period carry over.
IRC §1041(a), (b). Transfers between spouses or former spouses incident to divorce are nontaxable; no gain is recognized at the transfer, and the transferee takes the transferor's adjusted basis. The former wife's basis is therefore $40,000, and her gain on the $68,000 sale is $28,000. Because the transfer is treated as a gift for this purpose, her holding period includes the husband's holding period, so the gain is long-term. Choice A gives the former wife a fair market value basis and treats the transfer as a taxable event. Choice B has the correct basis but starts the holding period at the transfer. Choice C taxes the husband on the transfer and also gives the former wife a fair market value basis.
- What amount of gain must Kara recognize on the sale?
Answer: $102,500
IRC § 121(a) generally allows a single taxpayer to exclude up to $250,000 of gain on the sale of a principal residence. IRC § 121(c)(2) provides a reduced exclusion when the taxpayer fails the 2-year ownership-and-use test and the sale is due to a change in place of employment that places the new job at least 50 miles farther from the home. Kara had 18 months of qualifying use, so her reduced exclusion is $250,000 × 18/24 = $187,500. Her amount realized is $540,000 − $30,000 = $510,000, and her gain is $510,000 − $220,000 = $290,000. The recognized gain is $290,000 − $187,500 = $102,500. Choice A applies the full $250,000 exclusion despite the 18-month use period. Choice B is the exclusion amount, not the recognized gain. Choice D ignores the reduced exclusion. Thus Choice C is correct.
- How should the taxpayer report the sale on her 2025 return?
Answer: No gain or loss is recognized.
IRC §1015(a); Treas. Reg. §1.1015-1(a). For gifted property, the donee's basis for gain is the donor's adjusted basis ($10,000), and the basis for loss is the lesser of the donor's adjusted basis or the fair market value at the date of gift ($8,000). A sale at $8,500 falls between those two amounts, so no gain or loss is recognized. Choice A uses the $10,000 basis for loss and starts the holding period at the gift. Choice B uses the $8,000 gift-date value as the gain basis. Choice C makes both of those errors.
